Provident Financial Services Inc (PFS) 2014 Q2 法說會逐字稿

Good morning and welcome to the Provident Financial second-quarter 2014 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Leonard Gleason. Mr. Gleason, please go ahead.

Thanks, Jessica. Good morning, ladies and gentlemen, thank you for taking the time to join us this morning. The presenters for our second-quarter earnings call are Chris Martin, Chairman, President and CEO; and Tom Lyon, Executive Vice President and CFO.

Before beginning their review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call. Our full disclaimer can be found in the text of this morning's earnings release which may be obtained by accessing the Investor Relations page on our website, www.provident.com.

Now it's my pleasure to introduce our Chief Executive Officer, Chris Martin, who will offer his perspective on our second-quarter financial results. Chris?

Thanks, Len, and good morning everyone. Our core earnings of $0.31 per share this quarter reflect our May 30 acquisition of Team Capital Bank, which increased assets by almost $1 billion, loans by $631 million and deposits by $802 million.

More importantly, it brings us access to new markets and dedicated individuals that have hit the ground running. We expect strong returns from the Team Capital acquisition and are extremely excited about the progress and energy surrounding our efforts to integrate the operations in both banks. The lending and retail teams are on board and we expect further synergies once we convert the operating system in September.

Revenues have strengthened to historic highs and we continue to carefully manage our costs without compromising on risk assessment and monitoring.

Our net organic loan growth decreased during the quarter as payoffs of several large credit offset new loan originations. And while the New Jersey economic recovery remains uneven, signs of improvement in employment accompanied by stronger balance sheets of our commercial clients signal that better things are ahead.

Looking forward to the second half of 2014, we envision continuing opportunities for loan portfolio growth but we remain disciplined as to our risk-adjusted returns on loans and investments as the Fed ends its tapering.

The loan pipeline is strong, but we remain somewhat cautious while confronted with very aggressive rates and terms in the marketplace. We continue to see pricing pressure across the board, and the net interest margin compress slightly as we held excess liquidity pending the completion of the Team Capital acquisition.

Asset quality was stable during the quarter, delinquencies were down and charge-offs were reduced from the trailing quarter and prior year levels. We had anticipated the resolution of two large nonperforming credits that did not take place during the quarter but we are optimistic that they will be completed by the end of Q3.

Organic deposit levels were down primarily due to continued runoff of CDs accompanied by cyclical outflows of municipal funds. However, non-interest-bearing deposits now aggregate over $1 billion with the addition of team capital deposits, and core levels are stronger than ever at almost 85% of the total deposits as our weighted average costs declined to just 27 basis points for the quarter.

We are confident that customers in our new markets will benefit from our broader product base and service offerings, including our premium rate smart checking product and expanded escrow account and corporate cash management services. We have a stable retail deposit base and have stress tested it under various rising rate scenarios with acceptable results.

Borrowing levels increased, primarily due to the Team Capital combination as we repaid acquired borrowings and repositioned them to longer term fixed rates recognizing the gain of $486,000 in the process.

And while Tom will detail our noninterest income activity, we are pleased with the growth in our wealth management teams from Beacon Trust which has augmented increases in ATM, debit card and deposit fees.

Operating expenses, excluding nonrecurring items, were in line with our expectations. We have met our projections for revenues and transaction-related expenses related to team capital through the second quarter and we believe we are on track to exceed our pro forma estimates by year end.

We did take advantage of an opportunity to reduce future expenses for our frozen pension plan as we allowed lump-sum distributions to the retirees to reduce future obligations and the volatility in costs. Based upon our business and operational model, we expect to maintain our efficiency ratio in the mid to high 50s, growing revenue and investing in profitable business lines.

We consistently review our operations in franchise to meet our internal hurdles and get the best from our committed staff. Subsequent to quarter end, we've consolidated two New Jersey branch locations of Team Capital which will create additional customer synergies and have opened a Bergen County loan production office.

We also hired a small but extremely experienced asset-based lending team in July and look forward to growing this line of business. We continuously assess the impact of eventually exceeding $10 billion in assets. And we continue to build out our risk and compliance areas to take advantage -- to take on the additional regulatory burden and revenue challenges that come with crossing our threshold.

And we always evaluate other opportunities to increase stockholder value in both whole bank and the wealth management space while maintaining our well-capitalized strategy.

I will turn it over to Tom for the details of the quarter's numbers. Tom?

Thank you, Chris, and good morning, everyone. Our net income for the second quarter was $16.4 million compared with $17 million for the trailing quarter. Earnings per share were $0.28 compared with $0.30 for the trailing quarter.

Earnings for the quarter were impacted by items related to the Team Capital acquisition totaling $1.2 million or $0.02 per share, net of tax. In addition, we recognized the charge related to lump-sum distributions made from the Company's frozen pension plan that totaled $790,000 or $0.01 per share, net of tax.

Net interest income increased by $2.2 million compared with the trailing quarter to $57 million as average loans outstanding increased by $262 million. Growth was driven by the acquisition of commercial mortgage and C&I loans as well as originations of commercial, construction and CRE loans.

Average securities also increased by $30 million. However yields declined by 11 basis points versus the trailing quarter as a result of an increase in premium amortization on mortgage-backed securities, a reduction in the FHL-B dividend rate and the mark to market yields of the acquired Team Capital portfolio as of the May 30 merger date.

Combined with excess liquidity maintained during the quarter to fund acquisition costs, this resulted in a 4 basis point decrease in our net interest margin to 3.24%.

We provided $1.5 million for loan losses for the quarter compared with $400,000 in the trailing quarter. Nonperforming loans were essentially unchanged from the trailing quarter at $65 million or 1.1% of total loans. Net charge-offs for the quarter declined slightly to $1 million or an annualized 8 basis points of average loans.

The allowance for loan losses to total loans decreased to 1.08% from 1.21% at March 31 as a result of loans added to the acquisition of fair value. Excluding acquired loans, the allowance for total loans remains at 1.21% at June 30. The allowance coverage of non-performing loans also was essentially unchanged at 98%.

Non-interest income increased $2.2 million compared to the trailing quarter, primarily as a result of a $492,000 increase in wealth management income, a $486,000 gain realized on the pre-payment borrowings, a $110,000 gain realized on security sales versus the $350,000 loss in the trailing quarter and a $300,000 benefit recorded on a BOLI claim.

Non-interest expense increased $5.5 million versus the trailing quarter to $43.7 million. Compensation and benefits costs included $1.4 million related to lump-sum distributions from our frozen pension plan and $380,000 in severance costs and stay bonuses for Team Capital transitional employees.

Additional transaction costs totaling $1.7 million were included in other non-interest expense. Further, the stock-based portion of annual directors' fees added another $1 million to non-interest expense for the quarter.

Income tax expense was $6.2 million compared with $7.7 million for the first quarter and our effective tax rate declined to 27.5% from 31.1% as a result of increases in tax-exempt income from acquired municipal securities and bank-owned life insurance. We project an effective tax rate of approximately 29.5% for the remainder of the year.

That concludes our prepared remarks, we'd be happy to respond to questions.

(Operator Instructions) Mark Fitzgibbon, Sandler O'Neill.

I wonder if you could help us think through what the margin is likely to look like in the third quarter as well as operating expenses. Maybe what are some of the key variables we ought to be thinking about?

As far as margin goes, Mark, I think we stay fairly stable. Perhaps 1 to 2 basis points of compression is what we're seeing for our modeling. On the expense side of things, the run rate, I kind of get the core for this quarter about $38.5 million, $38.6 million. I think that's where we are on a core basis but we have some additional transaction-related costs to accompany the existence conversion in Q3, probably about $3.2 million there. So I think you'll see about close to $42 million in expense next quarter but on a core basis about $38.5 million.

So a lot of the cost synergies won't really start to come out, you think, until the fourth quarter? Post the systems conversion?

The remainder of the �- yes. The remainder of the cost with regard to employee costs. Although, I will say we're ahead of or pretty much close to what we modeled in reviewing the deal through the end of July.

Okay and then, I was a little bit surprised at the pipeline for construction loans was as strong as it was. What's driving that? And is it happening in any particular part of your footprint?

No, it's in all areas. Certainly we've seen multi-family, a couple of deals in the Jersey City area but we have people that are taking on small little projects. It certainly is an adjustable return, which we like; an adjustable rate with very well-heeled customers, and we're confident in that level. I think it's an area that probably hasn't seen that kind of volume in the past but certainly people we've dealt with in the past.

Okay and then, Chris, I was wondering is the flood of capital that recently came into your marketplace, is it affecting loan pricing?

Absolutely. And it's not just those that have the new capital by any stretch. I think everybody has their models and what they're trying to do. I think we're just seeing things a little differently. We are return on equity hurdles internally. We don't withdraw from the market but we are seeing some very aggressive terms, some very long interest-only portions of these deals and certainly a lot of lack of guarantees. A lot of pre-leasing requirements we would have expected that some people are foregoing. It's just a risk area that we look at little differently but it's making pricing very sensitive, but also structure that we have to pick and choose the deals. We do a great job with our clients and they love the speed of the market that we get quick decisions. But that doesn't offset at the rate of 50 or 60 basis points lower.

And lastly, I wondered if you could just share with us when you think Provident would be ready to do another deal? How long before you would contemplate doing something post-Team?

Well, as you know, it's been a while since we did a bank deal, going back to 2007. It's not that we would be anti-anything if it makes long-term shareholder value sense.

That being said, we want to get this one completed by the end of September. It doesn't mean that we couldn't handle another one but, as you know, capital levels are strong but we can't just go ahead and buy a huge company.

The other side of that would definitely be not just bank but also wealth management deals that we would look at. And the other thing is going at the $10 billion. The closer we get the more costs that will bring in, and we know that we are reviewing that now but that doesn't stop us from doing anything.

Thank you.

Rick Weiss, [Boenning].

Was there anything in the Team Capital acquisition that surprised you either positive or negative, either in terms of the bank itself or possibly the lending areas?

I would say not really surprising. I felt that during our diligence and certainly our lending team and credit group felt that they were just a smaller version of what we do. Again, pretty conservative, well-structured and I would say that I've been surprised with the professionality and the energy that the group has brought.

I would say it's like 1/6 of what we are and just happens to be in Western New Jersey and Eastern Pennsylvania. Same methodology, same dedication, same commitment.

So I'm actually very happy with what's gone to date in the way that everybody's been able to meet with clients. We are out there talking to them and they are very big fans of the people from Team and we get the same from the people at Providence.

So, it's really more of the same. I don't know that I've seen anything as a detraction from the deal at this stage.

And I'd echo that from a back-office side of things too, Rick. Folks have been tremendous in terms of professionalism and helping us to integrate back-office stuff.

Okay and in terms of your lending area in Pennsylvania, could you define that for us?

Certainly, we could be as -- we are not going to just say, okay, we're only going to be dealing with the Lehigh Valley and in Bucks County. We know that -- I think Montgomery County is a very strong area. We would go a little further West. We follow our clients and I think Team will do the same. The capacity with our balance sheet and our capital levels will allow the Team Capital group to be able to really expand the relationships and maybe reach people that they didn't get to in the past because of the size constraints.

And so, we are not anti-anything going up north into Scranton or anything else. We just follow our clients and the opportunities. So we're not really bound by just geography and counties.

Okay, it might be too early to tell, but are there any kind of pricing differences between your current markets in Jersey and what you are finding in Pennsylvania?

Although we really haven't seen a lot of that pull through, we have in the past seen about 25 basis points difference between New Jersey and Pennsylvania. And it's not that Pennsylvania isn't and Western New Jersey isn't competitive, it's just a few less players, a few less money center banks that we're having to compete with whereas in New Jersey, there's a lot more. But I think the same quality of loans is what we look for.

Okay. I guess my last question is with respect to the loan-loss reserve ratio where it dipped to 108 and I think the press release said it was pretty much all because of Team Capital. So then, I guess you would've said reserve would have been about 120 then without that?

I calculated 121 �- yes.

Okay, got it. Thank you.

Chris Jackson, Sterne, Agee.

I just had one quick question on your C&I portfolio. As far as loan utilization in the second quarter, how does that shake out compared to the first quarter and the year ago period?

About 42%. I think we're pretty much flat.

Same thing for the year ago period?

Yes, I think that's right about where we were. Perhaps a little bit less last year.

Okay, great. That's all I had, thank you.

Travis Lan, KBW.

Just one quick follow-up. Tom, just want to make sure I understood your expense commentary. You thought you were at about 38.5 core this quarter and you expect that maybe stability to little bit higher next quarter excluding the $3.2 million conversion charge. So even though you only had one month of Team Capital in the numbers this quarter, those numbers are kind of right what I was thinking about?

I think I was actually looking for stability to a little bit lower next quarter because we do get some benefit from some additional reductions in compensation. Some of the transitional folks who are leaving throughout the transition period as well as fulfilling some of those FICO requirements as people move through the course of the year. So I'm looking at 38 to 38.5 kind of run rate the next quarter, 38.

Got it, all right. Thank you.

Then I have an additional $3.2 million roughly in transaction charges we expect to see next quarter too though.

Right and those are just non-core similar to the merger charges this quarter?

Exactly, it's primarily around the systems conversion.

Perfect, all right. Thanks guys.

With no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Christopher Martin for any closing remarks.

Well, we appreciate your time and we look forward to an extremely busy and productive quarter coming up once we finish up this conversion that gets everybody to get back to the real business of banking customers and we are looking forward to getting that behind us. Thank you very much and have a good summer.

The conference has now concluded, thank you for attending today's presentation. You may now disconnect.